Central Banks and Governments Continue to 'Fight' Crisis

We continue to see central banks and governments around the world ‘fight’ the current financial crisis. Now that it appears deflation (and rapidly slowing global growth) is the key problem (not runaway inflation), we’re seeing central banks around the world cut interest rates and reduce loan reserve restrictions in an attempt to inject additional liquidity into the world market. We also see governments (see article below on Korea) increasing spending or talking about doing so. Central bankers also continue to recommend additional government spending to help the crisis.

The reason that we’re seeing these actions is that private banks around the globe are failing or are in serious trouble. As we’ve learned, the current global monetary system requires continual debt creation – someone has to provide new money or the system collapses. Everyone continues to treat the symptoms (loan defaults, credit ‘crisis’, slowing economic growth, etc.) while the disease (world’s debt-based monetary system) continues to wreak havoc on the world’s economies.

Also notice that we’re starting to see where central banks are saying that they have reduced interest rates and have provided additional liquidity – so there’s not much more they can do. What they’re saying is that the world is running out of options – get ready for a new global ‘solution’ as things rapidly deteriorate. I’m very interested to hear what is announced after the upcoming economic summit of world leaders in Washington D.C. on November 15.

jg – Nov 3, 2008
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NOVEMBER 3, 2008

Italian Central Banker Tells States to Act

By LUCA DI LEO
Wall St. Journal

ROME -- European Central Bank board member and Italian central bank Gov. Mario Draghi called on governments to sustain demand by boosting spending or cutting taxes, warning that the scope for using monetary policy to boost the economy is limited.

"Given the minimum level reached by America's official interest rates and the ample liquidity put in circulation by central banks, the room for monetary-policy maneuver is reduced," Mr. Draghi told a meeting of Italy's top bankers Friday.

"To sustain demand on a global level, the anticyclical action of budget policy may be required," Mr. Draghi said, warning that the world economy would stagnate until at least mid-2009.

Central banks around the world last week unleashed a new assault on the global economic downturn. The U.S. Federal Reserve on Wednesday cut its key rate by half a percentage point to 1%. Its move was accompanied by cuts in China and Norway. ECB President Jean-Claude Trichet last week signaled that the central bank is likely to cut its key rate this week from its current 3.75% level.

Mr. Draghi said European Union budget rules, which call on states to keep their deficit below 3% of gross domestic product, allowed for increased spending during tough times. His remarks indicate that central banks want governments to act since they are running out of ammunition.

Mr. Draghi, a former Goldman Sachs executive, said the crisis made state intervention more desirable.

Mr. Draghi effectively gave the green light to Prime Minister Silvio Berlusconi's government to approve further measures to shore up banks. But Mr. Berlusconi's cabinet, which has boosted liquidity and guaranteed bank debt this month, on Friday disappointed those in the market who were expecting further moves.

"It is not the government's duty to have banks. Having shares in banks can only be a transitory necessity," Economy Minister Giulio Tremonti told the same banking conference, adding that government intervention could be harmful.

His remarks were taken as a sign that no move by the government is imminent.
Write to Luca Di Leo at luca.dileo@dowjones.com

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NOVEMBER 3, 2008

India and Pakistan Ease Lending to Help Growth

By ABHRAJIT GANGOPADHYAY and NEELABH CHATURVEDI
Wall St Journal

NEW DELHI -- The Reserve Bank of India unexpectedly cut its key lending rate on Saturday for the second time in as many weeks, and also lowered the amount of money banks have to keep in reserve as a deepening global financial crisis threatens to stall growth.

The Indian central bank said it cut the repurchase rate -- its main short-term lending rate -- by 0.5 percentage point to 7.5% to ease the impact of the global liquidity crisis on India. It had cut the repurchase rate by one percentage point on Oct. 20, its first such cut since March 2004.

The central bank also cut its cash-reserve ratio -- the proportion of deposits that banks have to set aside as cash -- by one percentage point to 5.5%. The cut in the cash-reserve requirements will release 400 billion rupees ($8.11 billion) into the banking system.

In Pakistan, the central bank said Saturday that a one-percentage-point reduction to its cash-reserve ratio will take effect immediately, instead of the previous plan to implement it on Nov. 15. The State Bank of Pakistan has cut the cash-reserve ratio by four percentage points to 5% since Oct. 11, including the rate cut that was moved forward. Pakistan's foreign reserves have fallen steadily since November 2007, as foreigners pulled out money over rising political uncertainty and the weakening economy.

Meanwhile, the New Zealand government Saturday announced it would guarantee banks' wholesale funding on an opt-in basis to ensure domestic financial institutions can access funds. Finance Minister Michael Cullen said the decision will ease access to international funding markets for New Zealand banks.

The global financial crisis has had a rapid and deep effect on India's economy, which has been seen as a candidate to help the world weather the current downturn. Just a few weeks ago, the overriding concern for policy makers was containing inflation, especially in the run-up to a national election expected early next year. Inflation is a particularly sensitive political issue here because of the impact it has on India's hundreds of millions of poor.

But as the financial crisis has deepened, the threat to India's economic growth has increased. The central bank recently downgraded its estimate for gross domestic product growth in the year ending March 31, 2009, to a range of 7.5% to 8%, from 8% previously.

—Haris Zamir, Shri Navaratnam and Jackie Range contributed to this article.

Write to Abhrajit Gangopadhyay at Abhrajit.gangopadhyay@dowjones.com and Neelabh Chaturvedi at neelabh.chaturvedi@dowjones.com
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NOVEMBER 3, 2008

China Drops Strict Loan Caps on Banks
Central-Bank Move to Help Growth Marks First Acknowledgment of Lending Curbs

By ANDREW BATSON
Wall St. Journal

BEIJING -- China's central bank said it is no longer capping the amount of loans that commercial banks can make, abandoning a frequently criticized policy as it redoubles efforts to sustain the nation's economic growth amid the global financial crisis.

A spokesman for the People's Bank of China clarified the bank's policy in a dispatch by the official Xinhua news agency during the weekend following a string of three interest-rate cuts, the most recent unveiled Wednesday.

Some economists had questioned whether the rate cuts would help boost flows of credit to households and businesses because the central bank since late 2007 also has imposed strict limits on the amount of new loans that banks can make.
Those limits were designed to keep China's economy from overheating at a time when growth was still running relatively high.

The central-bank spokesman, Li Chao, said those credit curbs are no longer being enforced. "At present, the central bank is no longer applying hard constraints to the lending plans of commercial banks," Mr. Li was quoted as saying by Xinhua.
Mr. Li defended the original decision to impose the credit curbs as being justified by the economic conditions at the time, which included high inflation and the threat of excess capacity. "These policies were necessary and effective," he said.
Mr. Li's comments mark the first time the central bank has formally acknowledged the existence of the credit curbs.

Top-Down Instructions

Although the controls on lending were open secrets among businesses and in the press, the central bank never publicly discussed them. Its instructions on how much banks could lend were delivered orally to top executives, a practice that business groups criticized as unnecessarily secretive and arbitrary.

The loan limits were partially eased, though not removed, at the beginning of August.
The use of credit quotas -- a practice that had been largely phased out in recent years as China's state-controlled banks were reorganized to run on a more commercial basis -- was an attempt to curb growth in bank lending without raising interest rates.

The measures appeared to be effective, reducing growth in lending from a pace of above 17% last year to nearer 14% in recent months.

Critics, however, have said that much of the growth in credit simply ended up in harder-to-track areas like underground lenders or off-balance-sheet vehicles set up by banks.

News of the end of the credit quotas came amid further signs of a slowdown in China's economy, which is being battered by weakening in overseas demand and in the domestic housing market.

Economic Outlook Dims

The purchasing managers' index published by the China Federation of Logistics & Purchasing declined in October to its lowest level since the index was launched in January 2005.

The reading of 44.6, down from 51.2 in September, indicates a sharp contraction in manufacturing activity, led by a decline in new export orders and demand for construction materials like steel.

The worsening economic outlook for China, which has deteriorated more rapidly than most analysts expected, had already generated calls for the removal of the loan constraints.

In a commentary published last week, Fan Jianping, the chief economist of the State Information Center, a major government think tank, suggested canceling the loan-quota system in 2009.

The willingness to abandon the policy before then gives some backing to Chinese officials' repeated vows to be flexible and open-minded in finding ways to deal with the impact of the financial crisis and global economic slowdown.

"To guard against the economic and financial impact of this crisis on China, we will flexibly adjust economic policies, including monetary policy, when necessary, and strive to minimize the possible negative effects of this crisis," said Mr. Li, the central-bank spokesman.

Write to Andrew Batson at andrew.batson@wsj.com
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NOVEMBER 3, 2008

South Korea Plans $11 Billion in Tax Cuts, Other Stimulus
By EVAN RAMSTAD
Wall St. Journal

SEOUL -- The South Korean government early Monday proposed a fiscal stimulus plan of tax cuts and new government spending amounting to 14 trillion won, about $11 billion, for next year to help cope with the likelihood of slower economic growth.

Of the total, 11 trillion won will come from new spending and 3 trillion won will come from tax cuts. Government officials have been discussing ideas for stimulating the economy for the past two weeks. Monday's announcement marked the first time officials placed a value to their planning. Shares on South Korea's stock market were trading up 3% after the announcement and, in currency trading, the South Korea won was slightly lower against the U.S. dollar.

The Ministry of Strategy and Finance said 90% of the new spending will be sent to provincial and local governments for infrastructure and construction projects. Almost two-thirds of the spending will occur in the first half of next year, a step that recognizes how quickly the global slowdown may impact South Korea.
The country has been relatively insulated from the economic troubles that began with the collapse of the U.S. housing market, in large part because South Korean banks didn't buy many securities tied to subprime mortgages.

But when the economic crisis spread to credit markets and consumer purchasing, South Korea became more vulnerable because of its banks' borrowing on foreign markets and its heavy reliance on the manufacturing and exporting of products like TVs, cellphones, cars and steel.

Because of the global slowdown, government officials have said they expect South Korea's economic growth to slow next year to below 4%. Economists' forecasts for the nation's growth next year range from 2.5% to 3.5%. South Korea's annual growth this year is now expected to be just below 4%. That's down from earlier projections of 4.5% to 5%. The stimulus package amounts to about 4% of the government's annual budget.

Write to Evan Ramstad at evan.ramstad@wsj.com